Welcome back. MSCI, the indexing giant, this week said its ESG Government Ratings unit had downgraded Russia’s sovereign debt, along with that of its ally Belarus. This little-noticed rebuke raised an interesting question. At a time when many investors prefer to invest in stocks with good environmental, social and governance scores, why isn’t the same true for sovereign bonds? 

There have been a range of efforts to incorporate ESG considerations in sovereign-debt investing, but ESG-focused bond funds remain tiny.🔒 MSCI doesn’t tie its ESG ratings for countries to its widely used ESG indexes, even though it introduced the country ratings back in 2012.

Weighing all the environmental, social and governance factors that matter for a country is complicated. How, for instance, should a country's respect for minorities be weighed against how it treats its neighbors? But similar conceptual objections can be leveled at corporate ESG scores, which have taken off. John Normand, a former cross-asset strategist at JPMorgan who has taken a career break to study the philosophical underpinnings of ESG investing at the London School of Economics, outlined three reasons why ESG criteria haven’t been widely incorporated into sovereign-debt investing.

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The first relates to the concept of control. Owning a share in a company gives investors voting rights and makes them responsible to some degree for its actions. The same isn’t true of owning debt. Activists can pressure shareholders to change a company’s board, but they can’t ask bondholders to vote Vladimir Putin out of office.

Another reason is practical. There are more companies than countries, so removing a country’s bonds from a portfolio will typically make a bigger difference to its composition than removing a single stock. That means that tracking error—the degree to which the performance of an index-tracking fund would deviate from that of the index—is much greater for sovereign bond portfolios, making divestment more financially risky.

A third big reason is politics. Dumping the bonds of a country and pushing up its borrowing costs can hurt its citizens. And there are other considerations. If a big asset manager is trying to grow its business in a country that isn’t a democracy but could turn out to be a very lucrative market, excluding its debt from bond funds might not go down well with its leaders. “ESG criteria for sovereigns bring up an extremely uncomfortable situation,” Mr. Normand said.

This week: Arms companies; cloud computing; IPCC report; uses for CO2. 

A course-change on arms companies. Sweden-based financial group SEB said it would permit some of its funds to buy shares of weapons makers, reversing a position it adopted just a year ago as part of its commitment to investing based on environmental, social and governance principles. With share-prices soaring after European leaders promised to increase military spending, arms companies are hoping that the invasion of Ukraine will change the narrative around their sector.

“If you don’t have security and stability, if you can’t defend the open values of democracies, you cannot have any kind of sustainability,” said Jan Pie, secretary general of the AeroSpace and Defence Industries Association of Europe. He wants new European Union sustainable-investing guidelines to designate arms companies as socially beneficially investments. 

AWS’s decision to share more data illustrates how companies are paying closer attention to emissions from goods and services they buy, or Scope 3. For an AWS customer, data-center emissions fall under that category. David Mytton, a sustainable-computing researcher at Imperial College London, said only a few businesses are focusing on data-center emissions, but predicted that more will follow.

📅 Join us on April 20 for the second WSJ Pro Sustainable Business Forum. We’ll be discussing the latest thinking on business topics including regulation and reporting, working with the C-suite and board, navigating the carbon credits market and figuring out Scope 3 emissions. Speakers will include leaders in corporate sustainability, policy and investing. Click here to register. 

Worse than we thought. The United Nations issued its direst assessment yet of the impacts of climate change. Storms, heat waves, droughts and other extreme weather events are occurring more frequently and with greater severity🔒 than experts had predicted several years ago and are now causing serious health and economic impacts the world over, the U.N. Intergovernmental Panel on Climate Change said.

📝 We would like to hear from you. WSJ Pro Sustainable Business is conducting a short survey looking at issues including talent, targets, reporting and governance. The results will be shared in April. Click on this link to participate. We'd like to offer you a new WSJ report, "Key ESG Topics 2022" in appreciation for your time; it's an essential tool for anyone with responsibility in the sustainability area. Thank you!

SEC asks for detail on climate risk. The U.S. Securities and Exchange Commission is seeking more details from companies about their climate risks as it gears up to propose new disclosure requirements on the topic. The SEC last year sent at least 43 letters to U.S. public companies on the matter, compared with none the previous four years, according to data from Audit Analytics. The SEC requested information from the companies about ranging from physical effects such as severe weather to litigation and regulatory compliance costs. 

Supreme Court hears arguments on EPA powers. A case over federal authority to limit greenhouse-gas emissions went to the Supreme Court this week. Several conservative justices sought broad rules to rein in regulatory power, while the liberal minority said the Environmental Protection Agency’s approach adequately accommodated industry needs. West Virginia, leading a coalition of Republican-leaning states and small coal producers, brought the case. 

CDP, the environmental disclosure group, said almost all climate disclosures are inadequate. (Reuters) 

High energy prices are prompting a rethink of nuclear power. (Bloomberg) 

Three pilot projects in Massachusetts will use ground-source heat pumps for neighborhood heating, hinting at a potential future for oil and gas utilities. (Canary) 

The IPCC report found that moonshot geoengineering technologies designed to combat climate change could scramble weather patterns and bring other risks. (Climate Home) 

Ethical investors are split on whether they should be holding gambling stocks. (Responsible Investor) 

The United Nations this week agreed terms of a new treaty to stop plastic pollution. Here's what they mean. (Edie) 

A think tank linked to Japanese technology company Canon is coming under pressure to remove articles by a research director who describes the climate crisis as “fake news.” (The Guardian) 

Climate change was barely mentioned in the State of the Union as Russia overshadows the issue. (New York Times)  

Big retailers are getting into secondhand clothes. Whether resale benefits the planet will depend on if it actually offsets consumption. (Grist)